When you sell a property, the government taxes any capital gain you make.
Depending on your income and total gain, CGT can be up to 45%!
Here are 7 simple yet effective strategies you can implement to minimise or even avoid CGT altogether.
1. Don’t sell in the first year!
Once you’ve owned a property for over a year you’re entitled to a 50% tax break on any profit made when selling the property.
For example, let’s say you bought an investment property a few years back and then recently sold it, making a handsome capital gain of $200,000.
Your taxable amount can be immediately reduced by 50%, so you’ve already saved $100,000.
The next step is to work out your taxable income. Assuming a salary of $80,000, then your taxable income is $80,000 + $100,000 = $180,000.
By using this table on the ATO website we see that we just sneak into the fourth tax bracket and can then calculate our capital gains tax payable as $100,000 (50% capital gain) x 37% (tax rate) = $37,000.
2. Move in immediately
By moving in right away you qualify your property as your Primary Place Of Residence (PPOR).
Your main residence is exempt from CGT, so the profit is all yours if you sell.
As an added bonus, you also satisfy part of the requirements for receiving the first home owners grant (but only if it’s a new home).
If however you originally rented the property out, and then moved in at a later date, you are still entitled to a partial exemption.
The partial exemption is calculated as a proportion of the ‘years lived in’ to ‘years rented’.
3. Re-evaluate before you rent it out
This is critical for those who live in their residence for a time and then decide to move out down the track.
When you rent out your property, the capital gain is calculated by the difference between the final sale price and the property value at the time it was rented.
However, if you didn’t get the property revalued at the time of renting out the property, then the property value will be taken from the original purchase price.
To avoid paying more CGT than necessary, don’t forget to get the property revalued by a licensed valuer before renting it out. This can now be used as a new cost base from which to calculate any future capital gains.
4. The 6 year rule
The ATO allows owners to rent out their property for up to 6 years and still be entitled to a full CGT exemption, provided you are not using another property as your main residence. This is commonly known as the ‘6 year rule’.
It’s worth noting that the 6 years doesn’t have to be continuous; if the property is empty for a while then this period is not included in the 6 years.
This means that after renting your property out for say 2 years, if you were unable to find tenants for a few months or if you undertook some renovations, the clock stops. You can then rent out the property again for a further 4 years and still sell the property without having to pay tax on any capital gains.
If you do exceed the 6 years, then you need only pay tax on the proportion of time that the property was rented for longer than 6 years. This would be an excellent time to get your property revalued!
An important note for those with multiple properties is that the 6 year rental period is cumulative between properties. So if you own 2 properties with one as your PPOR and then rent both out, CGT will come into effect on your main residence after just 3 years because the cumulative rental period between both properties is 6 years (3 years x 2 properties).
5. Offsetting your capital gain
If you’re still left with a significant capital gain despite implementing the above strategies, then you should try to offset your gain by reducing your taxable income in other ways.
Some options you can consider:
- Buy another property and pre pay the interest for the first year (fixed rate loans only)
- Prepay your life or income insurance for a year (actually prepay anything that’s tax deductable)
- Take some unpaid leave from work
- Make some super contributions
- Donate to charity
- If your income varies from year to year, wait for a low income year and then sell
There’s plenty of options you can use, this list is by no means complete and you should try to come up with more potential income offsets for your personal situation.
6. Sell in July
30th June is the last day of the financial year and as such the last day any income for that year is included to.
By selling in July you can give yourself a full year to implement as many income offsets from above as possible. Additionally, it gives you more time to get your paperwork in order e.g. valuations, rental agreements etc.
At the very least, you keep the money for another year and could at least earn some interest.
7. Don’t sell!
It might sound silly, but it’s actually one of the most popular strategies with professional property investors.
What do they do then? It’s a method known as refinancing.
First of all, you need to get your home revalued to work out how much theoretical capital gain you’ve made.
You can then approach your lender and refinance your loan based off the new property value, i.e. you can borrow additional money because your LVR is now much lower so you have the option to borrow more.
In this way you are able to access the equity you have in your property and then use that money for a new investment e.g. buying a second property. And of course, you’ve avoided paying any CGT.
This is actually the beginnings of how real estate tycoons buy more and more properties and end up with seriously large property portfolios.
Looking for an additional 4 bonus strategies?
I’ve got 4 more killer strategies you can use which aren’t included in this article. Click here to download all 11 strategies in PDF.
I would like to thank Adam Sweeny for this fantastic article. Adam is the Director at DIY Property Investment. At DYI Property Investment you will find step-by-step guides on exactly how you go about searching for, buying and managing property, be it for investment purposes or to live in. You will also find tips and strategies on tax, home loans and more, tailored towards the Australian real estate market.
Warning: Pumped On Property are not investment advisers. This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. All readers should seek independent and qualified investment advice before purchasing a property.